Rare-earth prices are set to extend their decline from records this year as buyers including Toyota Motor Corp. and General Electric Co. scale back using the materials in their cars and windmills.

Prices for cerium and lanthanum, the most abundant rare-earth elements, will drop by 50 percent in 12 months, Christopher Ecclestone, an analyst at Hallgarten & Co. in New York, has forecast. Neodymium and praseodymium, metals used in permanent rare-earth magnets, may fall as much as 15 percent, he said.

Makers of electric cars, wind turbines and oil-refining catalysts have sought to reduce use of the metals after China, which supplies more than 90 percent of the market, said in July 2010 that it would cut exports and clamp down on the industry. That boosted prices, encouraging mining companies to develop new prospects and buyers to find alternatives.

“If you think you can keep raising the prices for those materials and still keep your customers, you’re crazy,” Jack Lifton, co-founder of Technology Metals Research, said in a telephone interview. “The principal customer for rare-earth metals is a global automotive industry using rare-earth permanent magnets. That industry will engineer this stuff out.”

Declines in August and September pared a five-month, fourfold surge that brought the average price for eight of the most widely used rare-earth oxides to a record 396,850 yuan ($62,025) a metric ton in July, data from consultant Shanghai Steelhome Information show. The average price declined 13 percent from its July peak as of Sept. 27.

Share Performance

The Bloomberg Rare Earth Mineral Resources Index dropped 43 percent in the past three months, led by a 61 percent decline in Montreal-based Quest Rare Minerals Ltd. Great Western Minerals Group Ltd., which explores in North America, climbed 3.1 percent in the period and is the only gainer on the 17-member benchmark.

Rare earths have been pushed lower because of selling by speculators, Michael Gambardella, a New York-based analyst at JPMorgan Chase & Co., said in a report last week. Tsunami-related disruptions in Japan and dumping of unpermitted material in China have undercut prices, while industrial substitution has driven “demand destruction,” said Sam Berridge, a Sydney-based analyst at Royal Bank of Scotland Group Plc.

“A greater focus on recycling and substitution, particularly by Japanese consumers, has resulted in tightness of demand easing somewhat for the lighter rare earths,” Berridge said by phone.

‘Huge Savings’

Rising prices for the so-called light metals, such as neodymium and lanthanum, have prompted automakers including Toyota, Asia’s biggest automaker, to look at reducing the use of relatively powerful and expensive rare-earth magnets in their vehicles. Some Toyota vehicles will be built with an induction motor, which doesn’t use rare-earth magnets, said John Hanson, a Toyota spokesman in Torrance, California.

“Moving from a fixed-magnet motor to an induction motor is a huge savings with regard to rare-earth metals,” Hanson said by phone.

“The Japanese are leading the push to replace, reduce and recycle their rare-earths consumption,” said Dudley Kingsnorth, chief executive officer of Perth-based advisory Industrial Minerals Co. of Australia. “Users are recycling rare earths wherever they can, using them more efficiently, particularly in the magnet industry where they are producing powerful magnets with smaller volumes.”

GM’s Plans

General Motors Co., the largest U.S. automaker, plans to sell a Chevrolet Malibu Eco next year that uses an induction motor, and otherwise cut down on magnets that use a lot of rare earths.

“The magnets are like God’s gift to electric motors,” Pete Savagian, GM’s chief engineer for electric motors, said in a telephone interview. “But we don’t always need that level of magnet. Even at prices we saw three and four years ago, there’s a more economic alternative, albeit at slightly less efficient outcome.”

The largest portion of demand for rare earths, one third, comes from generating electricity, according to Bloomberg Industries.

In August, GE announced the development of wind-turbine generators that will reduce dependence on the rare-earth materials prevalent in so-called permanent-magnet machines. Some current offshore wind turbines may contain as much as half a ton of the metals, according to Bloomberg Industries analysis.

‘Demand Destruction’

“Everybody is going back to the drawing board and trying to redesign their generators to minimize the usage of permanent magnets,” said Steve Duclos, chief scientist and manager of material sustainability for GE Global Research. “In all of our businesses we’re looking to reduce our usage.”

Companies that use cerium to polish glass, such as manufacturers of liquid crystal displays, will reduce their reliance on the element by as much as 70 percent this year by installing new polishing machines, said Jonathan Hykawy, an analyst with Byron Capital Markets in Toronto.

“They made the decision to substitute operational expenditure with capital expenditure,” Hykawy said. “Even if the price of cerium goes back to $5 a kilo, they will continue to buy less cerium because the machines are there and they’ll save a little bit of money. That’s a quasi-permanent demand destruction for cerium.”

Gasoline Refining

W.R. Grace & Co. this year began selling an oil-refining catalyst with reduced lanthanum, a rare earth that has increased in price more than fourfold in the past year. Lanthanum improves the amount of gasoline refiners can extract from crude oil and is also used in hybrid-car batteries.

Half of the company’s customers had switched to the new formula, which offers the same performance and gives them “double-digit type percent decreases in their cost,” Grace Chief Financial Officer Hudson La Force III said on a conference call this month.

The development doesn’t worry Mark Smith, CEO of Molycorp Inc., owner of the largest rare-earth deposit outside China.

Fluid-cracking catalysts have “always been one of the largest single markets for any of the individual rare earths,” Smith said in an interview at Bloomberg headquarters in New York. “We don’t see that deteriorating in any significant form.”

While rare-earth prices have fallen, demand will outpace supplies even with new mines in California and Australia expected to come online in 2014, Smith said.

‘Short Supply’

“Like any market, you’re going to see up and down in the course of a month or two,” Smith said. “But the overall trend remains short supply, heavy demand.”

The ability to substitute many rare-earth applications will be limited, said Constantine Karayannopoulos, CEO of Neo Material Technologies Inc., a Toronto-based producer of rare-earths, magnetic powders and rare metals.

“All kinds of folks are trying to use alternative technologies,” he said by phone. “Longer-term, don’t expect these technologies to be in place this quarter or the next.”

Molycorp fell $1.22, or 3.5 percent to $34.06 as of 4:15 p.m. in New York Stock Exchange composite trading, extending its decline this year to 32 percent. Neo Material Technologies dropped 63 cents, or 8.9 percent, to C$6.47 on the Toronto Stock Exchange. Its shares have tumbled 17 percent this year.

“It will depend on the element, it will depend on the usage, but getting 10-20 percent efficiencies out of the usage of an element is not that terribly difficult,” Duclos said. “What I don’t subscribe to is this idea that there’s nothing we can do.”